Bloomberg's International Tax Monitor quoted Peter A. Barnes regarding the Tax Analysts' forum on U.S. state considerations for international tax reform. Panelists discussed the parallels between state corporate income tax regimes and proposals being considered by the Organization for Economic Cooperation and Development to combat BEPS. For the complete article, please click on the above link to view a PDF.
Excerpt taken from the article.
Instead, the ultimate solution may be to retain separate entity accounting while allowing for some kind of formulary option as an alternative transfer pricing method, said Peter Barnes of Caplin & Drysdale in Washington.
"Separate entity reporting is the only way to go," Barnes said June 18, "but within transfer pricing methods there are a variety of accepted approaches."
In some cases, he said, "profit split is a reasonable way to allocate income."
Rather than choose between two extreme options, he said, nations ultimately may end up with "a menu" of approaches to address base erosion and profit shifting. One of them may be to apply some kind of formulary approach within a separate entity context, he said. Another option may be to rely more heavily on transaction taxes, he said.
However, it is clear that if some nations retain separate entity accounting and other countries adopt a form of combined reporting, compliance will become far more complicated and costly for multinationals, Barnes said.
Barnes said he is skeptical that a global formulary approach can work because of the wide variation in profit levels among countries. India, for example, has documentation to show that a number of multinationals enjoy profits within its borders that are two to three times higher than the corporation's global average, he said.
A formulary approach effectively throws all the multinational's revenue into a pot and divides it among the countries where it is doing business. Under that approach, he said, India wouldn't likely accept a global profit level of 10 percent when it knows that the multinational is clearing profits of between 20 percent and 30 percent within its borders.